Spanish Banking: A Leading Student in Europe in Risk Reduction

The banking union, launched at the end of 2014 as a response to the financial crisis, is still awaiting completion as no agreement has yet been reached on the European deposit guarantee fund. The debate around it has polarized various European countries into two large blocs, known as risk sharing and risk reduction. Proponents of risk sharing advocate that a European financial system supported by a single currency requires a unified deposit guarantee fund for all banks in the eurozone to serve as a common backing measure and prevent national biases. Meanwhile, advocates of risk reduction argue that before discussing sharing risks, it is essential to reduce them, especially in those countries that were most affected by the crisis. One of the main focuses in this risk reduction process is centered on non-performing loans (NPLs), which surged to high levels in many entities following the financial crisis and present significant heterogeneity among countries. Thus, the European Commission and the ECB announced specific measures for reducing non-performing assets, which entail imposing a very burdensome provision timetable for new NPLs that may arise, as well as an ad hoc plan by the supervisor to reduce the stock of these assets in the medium term. Despite the doubts raised among entities regarding the coexistence of two parallel proposals for handling NPLs from the EC and the ECB, which do not align in their scope or implementation timeline, and the fact that this approach somewhat represents a step back in the process of implementing internal models for provisioning calculations stemming from the new accounting regulation (IFRS 9), these measures have been accepted by European entities, particularly Spanish ones, as necessary to standardize the treatment of NPLs across different countries. Consequently, in recent months, there has been an additional push in the process of selling non-performing loan portfolios that was already underway, leading to an intense reduction in delinquency levels. In this context, Spanish entities have been leading students at the European level. So far in 2018, the volume of ongoing non-performing loan portfolio sales exceeds 27 billion euros in nominal value, and in 2017, the figure was even higher, accounting for around 50 percent of the total in Europe. The actions taken by domestic banking have allowed for a significant reduction in the credit delinquency rate of the Spanish financial system, dropping from 5.6 percent in December 2016 to 4.4 percent in December 2017 at a consolidated level, according to data from the Bank of Spain’s Financial Stability Report. In contrast, the average of significant European entities stood at 3.9 percent in the first quarter of 2018, and the European Banking Authority has established a threshold of 5 percent above which concrete measures must be taken to reduce risk. This data highlights that the trend is very positive and will allow for convergence with average European levels in a short span of time. However, despite these regulatory efforts to standardize risk levels at the European level and those being carried out by the entities themselves, the reality is that the European deposit guarantee fund project (the main battleground for advocates of risk sharing, including Spain) remains stalled. This is despite the European Commission, in an effort to find common ground, scaling back its scope in its latest proposal, sidelining full mutualization and opting for a reinsurance model combined with a possible mandatory loan scheme among the various national funds. Therefore, we believe the time has come to decisively address the closure of the banking union project with the approval of the regulation of the third pillar. It is evident that this process will take years to complete, and it is reasonable to link it with the risk reduction process so that when the various national funds are finally integrated, the different countries are as homogeneous as possible. However, this is no excuse to delay the start of the journey, which would also send a very positive signal to the markets and represent a decisive step in the construction of the European financial market.